India's firms build global empires (p. 2)

In Mumbai, India's financial hub, bankers joke about "reverse colonization." An oft-heard lament is that the deals reported in the financial press are nothing compared with the ones considered and then rejected. Ranbaxy, which gobbled up no fewer than eight firms last year, passed on an opportunity to buy Germany's Merck. The drugmaker was sold instead to Mylan Laboratories in the U.S. for $6.6 billion. "Acquisitions, yes," says CEO Singh, "but not in a reckless manner."

Ranjit Pandit, managing director of the Mumbai office of General Atlantic, a U.S. private equity group, says it wouldn't surprise him to see a $50 billion deal. "Suddenly," he says, "bankers the world over are beating a path to India."

Remarkably, few of India's foreign acquisitions have gone awry. For now at least, there is no Indian equivalent of TCL, the Chinese TV manufacturer still struggling to digest its 2004 purchase of the troubled television division of France's Thomson. Nor have Indians encountered the sort of political backlash that thwarted efforts by CNOOC, China's state-owned petroleum giant, to purchase U.S.-based Unocal in 2005.

Tata's bid for Jaguar and Rover, which are expected to go for at least $1.5 billion, will test his limits. That deal would bring Tata's automotive unit new technologies and a broad international sales network. But industry analysts question how Tata Motors, whose products and sales service finished at the bottom of J.D. Power's 2007 India customer-satisfaction ranking, would revitalize the two money-losing British luxury brands. It's hard to see how either company will mesh with Tata's push to produce the world's cheapest passenger car, at about $2,500.

Anand Mahindra, CEO of Mahindra & Mahindra, India's largest manufacturer of tractors and SUVs, wonders whether India's global expansion resembles corporate Japan's buying binge during its 1980s bubble economy. "Is this really the carpe diem moment for India?" he asks. "Is this part of a well-considered strategic roadmap? Or is it all just steroids?"

Mahindra won't comment on reports he dropped out of the bidding for Jaguar and Rover. But he is hardly shrinking from other opportunities. Over the past several years he has purchased a tractor plant in China and diversified into the forging industry by purchasing companies in Germany and Britain. Each acquisition made sense, he argues, because it brought new technologies, new customers, or significant economies of scale.

Mahindra has also entered into an alliance with Renault to build a passenger car based on the French automaker's low-cost Logan sedan. Together with Renault and Nissan, he is investing in a $900 million passenger-car plant on the outskirts of Chennai. That facility, which will be India's largest auto factory, is scheduled to open in 2009 with an annual capacity of 400,000 vehicles. That same year Mahindra plans to launch a range of compact pickups and hybrid SUVs in the U.S.

The surge in Indian outward investment has been matched by rising interest from overseas private equity funds in deals that go in the other direction - $28.8 billion so far this year. Blackstone, Carlyle, TPG, and others have all raised funds for Indian investment. The model is Warburg Pincus, which cashed in an early investment in Mittal's Bharti Airtel for a billion-dollar profit. But so far most foreign private equity deals have been limited to small stakes in successful firms that don't confer management leverage.

"The mindset here is different," says Mickey Doshi, head of Credit Suisse's investment banking arm in India. "For the most part these are family-controlled businesses, and it's just not in their DNA to sell."

Multinationals seeking to expand their presence in India are having better luck. For companies like Wal-Mart (Charts, Fortune 500), Citigroup (Charts, Fortune 500), or Procter & Gamble (Charts, Fortune 500), the sheer size of the Indian market has obvious appeal. McKinsey expects Indian incomes to triple over the next two decades, lifting 290 million people out of poverty and expanding the ranks of India's middle class to 580 million.

Increasingly, foreign firms describe India, with its deep pool of technical and engineering talent, as not only a market but also a vital link in their global value chain. Accenture, EDS, and Google are all expanding aggressively in India. Cisco is building a sprawling campus in Bangalore and wants to fill it with 10,000 employees. At IBM, CEO Sam Palmisano has increased the company's India workforce to more than 50,000 - twice its size in 2004 - while slashing payrolls in the U.S., Europe, and Japan.

Consultants at Paris-based Capgemini, reviewing the results of a survey of 340 of the world's largest manufacturers, last month declared that India "could challenge the position of China as the manufacturing center of the world within the next three to five years."

But direct investment in India remains a tricky proposition. To conform to restrictions protecting India's small shopkeepers and wholesalers, Wal-Mart has been obliged to enter into a complicated alliance with Bharti's retailing arm, and the company faces popular protest when the venture's first stores open later this year.

Meanwhile, U.S. and European tech companies that rushed to India in search of inexpensive knowledge workers are finding the talent pool smaller than they imagined - and with so many foreign and domestic firms fishing in it, wages for engineering graduates are rising 15% a year.

On the outskirts of Chennai, a city of seven million on India's southeastern coast, a sprawling manufacturing plant run by South Korean carmaker Hyundai Motor highlights India's promise as a manufacturing export hub - and its peril. Hyundai came to Chennai in 1995 after Beijing rebuffed its request to build passenger cars in China. Tamil Nadu state officials granted Hyundai permission to build a factory and retain 100% ownership.

Today that plant is arguably India's finest manufacturing facility, capable of cranking out 1,000 cars daily - six different models, with right- or left-hand steering, and in a rainbow of colors. One in three cars built there are for export, and all conform to European safety and emissions standards. A second assembly line, kicking into operation this month, features state-of-the-art Korean robots capable of welding an entire auto frame in 54 seconds.

Hyundai sources 90% of its parts locally. It is Tamil Nadu's top taxpayer and, together with the more than 50 suppliers that followed Hyundai from Korea, accounts for about 30,000 jobs in Chennai. But unlike China, or for that matter most U.S. states, officials in Tamil Nadu offered no assistance with infrastructure, power, or water. Talk of a railway line linking the Hyundai plant directly to Chennai's port remains just talk. To ease congestion, the city of Chennai restricts large trucks from using its roads until after 8 P.M. Even then it often takes three hours to traverse the 19 miles from factory to port - leaving just enough time to unload cargo and return to the plant before the morning rush.

One hundred miles south of Chennai, near Pondicherry, trucks bearing state-of-the-art wind turbines and 130-foot rotary blades emerge from the gates of Suzlon's gleaming plant, then snake slowly through rice fields and around thatched-roof huts along a dusty rural lane.

But if bad infrastructure is an impediment to Suzlon's growth, it is also the source of its success. Tanti's first venture was a polyester factory launched in the 1980s after a stint managing the family construction business. Electricity was a constant headache. India's power grid is notoriously erratic, obliging even small producers to operate their own generators. To cope, Tanti turned to wind power in 1995, purchasing two turbines for his plant.

But operating and servicing the giant contraptions proved a full-time proposition. As it dawned on him that other manufacturers faced similar problems, he threw caution to the wind. Abandoning textiles, he rounded up a group of former engineering classmates, rented a factory, and hired a German consultant on a 90-day contract to teach them the business. For their first customer they built ten wind turbines in four months.

Tanti decided early on that the key to holding customers was to make wind power hassle-free. "Other companies were just equipment vendors," he explains. "They'd give you the turbine, and that was it. Maintenance? 'Not my problem.' Parts? 'That's someone else.' The way we do it, it's like selling a model home. All the customer has to do is pick the model."

Today Tanti controls all the links in his supply chain, including site selection, design, manufacture, installation, and customer service. Suzlon builds engines in Germany, gearboxes in Belgium, and rotary blades in Pipestone, Minn. It operates one of the world's largest wind farms in Mahashtra, with 500 turbines spanning 1,300 acres. For the past three years, Suzlon has clocked average annual sales growth of 126%, and it recently overtook Siemens as the world's fifth-largest wind-power supplier.

The success of Suzlon's October 2005 debut on the Mumbai exchange was a milestone for the industry, one that got the attention of global investors who had previously dismissed wind as a marginal, low-growth technology dependent on government subsidy. Suzlon's market value has swollen to $12 billion, making Tanti one of India's richest men. "Our IPO changed the image of the whole industry," says Tanti. "Suddenly everyone saw the potential."

To stay focused on Europe, his biggest market and home to the industry's most advanced design and manufacturing, Tanti has moved Suzlon's international headquarters to Amsterdam. To keep pace with his global ambitions he has raided GE for his CEO, ABB for his CFO, and Shell for his HR chief. Yet Tanti insists an enterprise as cosmopolitan and convoluted as Suzlon could only have been invented in India.

"We have a business model that's completely counterintuitive," he says. "The concepts and design come from the Netherlands, the engineering from Germany, the commercialization from Denmark. And large-scale application comes from India. Only an Indian brain could dream up such a thing."

Increasingly, Indian dreams are shaping the reality of global commerce. Those dreams, like the currents of Tanti's turbines, offer great potential as a force for future growth.

Research Associate Joan L. Levinstein contributed to this article.

Tulsi Tanti

SUZLON ENERGY

BOUGHT 86% OF GERMAN WIND-TURBINE MANUFACTURER REPOWER EARLIER THIS YEAR, MAKING HIS COMPANY THE FIFTH-LARGEST SUPPLIER OF WIND POWER IN THE WORLD. 

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